The Millionaire Next Door by Thomas J. Stanley and William D. Danko is on many lists of “top personal finance books” – but should you read it?
If you are looking for a book on how to manage your personal finances – this isn’t it. But if you are curious about the lifestyle of the average U.S. millionaire, and how they got to be one, then act like one of the frugal millionaires in this book and get a free copy from the library. Read the very interesting first half of the book, but maybe just skim the rest.
Some of the language in the book is a bit dated (they talk about “housewives” a lot). It was written in 1996 and re-released in 2010 with a new preface. Also, a millionaire in 1996 would be about a $1,860,000-aire today, so you need to about double the numbers in the book.
However, the initial premise of the book – that most millionaires are not who you would expect and may even be living next door to you – is quite fascinating.
The authors note that when they first began studying how people become wealthy, they started by surveying people in upscale neighborhoods, but soon discovered that many of them did not have much wealth.
“Then, we discovered something even odder: Many people who have a great deal of wealth do not even live in upscale neighborhoods.”
“Most Americans have no idea about the true inner workings of a wealthy household. The advertising industry and Hollywood have done a wonderful job conditioning us to believe that wealth and hyperconsumption go hand in hand. Yet, as I have said many times, the large majority of the rich live well below their means.”
They also note that “If you make a good income each year and spend it all, you are not getting wealthier. You are just living high. Wealth is what you accumulate, not what you spend.”
That, to me, is one of the best things about the book – it does a very good job of distinguishing between wealth and income, which are two very different things.
They present statistics about how people with high net worth tend to be frugal – they drive older model cars, and spend modestly on clothes, shoes and accessories. They also spend more time on planning their finances and budgeting.
“When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictable question: Why would someone who is a millionaire need to budget? Our answer is always the same: They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”
The authors give a number of case studies describing the lifestyles of millionaires that they interviewed and comparing them to people with extravagant lifestyles but little wealth.
“Mr. Friend never really enjoys his life. He owns a lot of upscale things, yet he works so hard and for so many hours during a typical day that he has no time to enjoy them. He has no time for family, either. He leaves his house each day before dawn and rarely returns home in time for dinner. […] In spite of earning millions during his lifetime [..] his total net worth is less than $300,000. No wonder he started asking us questions such as: Will I ever be able to retire?”
They note that 80% of America’s millionaires are first-generation rich – so you do not need to be born wealthy to become a millionaire. That being said, the children of affluent parents have about a one-in-five chance of becoming millionaires, while children whose parents are not wealthy have about a one-in-thirty chance. So it does help!
But this means that most people who have affluent parents do not, themselves, become wealthy. One reason can be that they grow up used to an affluent lifestyle and never learn the frugality that caused their parents to accumulate their wealth in the first place.
They also talk about the negative effects of cash gifts, which they call “economic outpatient care” on the children of the wealthy. They present many statistics that show that, as well meaning as they might be, giving economic assistance to your children causes them to, in the end, have less wealth and lower earnings.
“In general, the more dollars adult children receive, the fewer they accumulate, while those who are given fewer dollars accumulate more. […] Adults who sit around waiting for the next dose of economic outpatient care typically are not very productive. Cash gifts are too often earmarked for consumption and the support of an unrealistically high lifestyle.”
The authors go on to make recommendations for better ways to bequeath your wealth to your heirs – which is more interesting if you, yourself, are a millionaire.
Towards the end I felt like they were throwing in a bit of filler to try to make it be book-length, but despite that I think it is worth reading. It presents some statistics about millionaires, and what it takes to be one, that I have not really heard from other sources. It also makes the idea of becoming a millionaire seem more approachable, since most of the millionaires they survey are much more like the person “next door” than the stereotype of the superrich you might see on TV. And best of all it really hammers home what they call the “fundamental rule of wealth building” – which it truly is:
“Whatever your income, always live below your means.”
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